Credit card fees targeted

John Collett

The proposed new laws on credit cards should be passed by parliament as they will help to limit the dangers of the not-so-fantastic plastic. The credit card is the financial product, above all others, that gets the most number of people into financial trouble. I don't mean the sort of financial trouble that sees people ruined and facing bankruptcy, though that happens, but rather, it undermines their efforts to build savings and keep on top of their bills.

Credit cards can be handy for overseas travel, for buying stuff online and emergencies. Most people use their cards wisely and pay off the whole debt that is run up on the card within the interest-free period. But a significant minority of people pay interest rates of between 10 per cent a year and 20 per cent on regular credit cards and up to 30 per cent on store cards.

Most lenders allow the credit limit to be exceeded, with a fee of up to $40 for the privilege.

The draft legislation, which is part of the government's Fairer, Simpler Banking reform package, bans institutions from charging excess credit limit fees. It stops institutions from allowing cardholders to exceed their credit limits by more than 10 per cent or $500, whichever is the lower. The draft legislation also puts a halt to institutions making unsolicited credit limit extension offers to cardholders. These offers will often say to cardholders that the increase has been "pre-approved", which helps to give some cardholders the impression that they can afford the higher limit.

The offers avoid using the word "debt" and emphasise the benefits - the rewards programs, bonus points and perhaps even extras like free international travel insurance. But they usually do not show the hefty interest rate charged on debt that is not repaid within the interest-free period or other costs like annual fees and, when it is, it's buried in the fine print.

Another excellent part of the proposed legislation is that institutions will have to allocate cardholders' repayments to the highest-interest debt first. Most cardholders are unaware that their repayments are used to pay off the debt that is incurred first. If the new laws are passed they would likely come into effect from July 1 this year and they would apply to all cards from that date, not just to new cards.

Naturally, the four big banks, which between them account for about two-thirds of the local credit card market, are up in arms over the proposed changes. The Reserve Bank of Australia, in its June quarter 2010 Bulletin, says that fees on exceeding credit card limits, including late payments, totalled $470 million for the year to June 30, 2009. That's a big number. But reforms are not going to affect the big banks' massive profits or shareholder returns.

They can more than afford it. It was reported that Boston Consulting Group has found our banking sector has the third-highest return on equity (ROE) in the world after Switzerland and Canada. The Commonwealth Bank, Australia's largest bank by market capitalisation, is the second-highest ROE in the world after the Canadian Imperial Bank of Commerce.